A construction boom is boosting demand for steel in the country. The sale of steel and other construction materials has grown rapidly in recent months, helping the economy recover from the crippling impact of the coronavirus pandemic much faster than many had thought.
“There is no doubt things are gearing up for the steel industry. We’ve seen a significant increase in demand for steel after the Covid-19 lockdown restrictions were lifted. We expect demand to increase phenomenally as new infrastructure, commercial and housing projects start,” Hussain Agha, chief executive officer (CEO) of Agha Steel Industries, said in an interview.
The current demand for construction materials is driven mostly by increased public sector spending on infrastructure development, and the resumption of water storage and power projects being financed through Chinese loans under the China-Pakistan Economic Corridor initiative. The amnesty scheme that allows individuals to invest their money with no questions asked in the real estate and housing sectors is also fueling steel demand.
Mr Agha describes Prime Minister Imran Khan’s housing package as one of the biggest game-changers for the economy. “More than half of our economy is undocumented and the amnesty scheme is helping bring huge liquidity back into circulation and drive investment in the real estate and housing markets. This initiative will further bolster long term stability for our economy as more wealth creation comes under the tax net through this pioneering scheme.”
‘With China controlling more than half of the world’s steel capacity, what it makes in 24 hours is what we produce in one year’
The young CEO of one the country’s largest steel companies, which last month raised Rs3.8 billion through the initial sale of 120 million shares on the stock market to finance its Rs7bn capacity expansion plan, believes that the amnesty scheme intended to encourage tax evaders to invest into building homes had provided the “first push” to the construction industry.
“The second impetus will come when banks start giving loans to build and buy homes. The central bank has asked banks to allocate 5 per cent of their total private sector lending to the construction and realty sectors. This will hopefully fuel much bigger housing demand from the first quarter of 2021 and beyond.”
Global steel production has grown by over 30pc to 1.869bn tonnes in the last 10 years, but its demand in Pakistan is at around 7.1m tonnes a year or about 33kg per person. This is one of the lowest in the world, considering global consumption of around 214kg. Compared with Pakistan, the per capita consumption in India is more than double; it is 300kg in China and 500kg in the US.
On top of that, the country cannot meet even this meagre demand without significant imports as the domestic steelmaking capacity is estimated to be nearly 5.1m tonnes or just 0.28pc of the total global production. The quality graded steel production is estimated to be 3.8-4m tonnes while the remaining 1-1.2mn tonnes is ungraded or belonging to the low-quality sector.
“Pakistan is like a rounding error when it comes to steelmaking capacity worldwide,” Mr Agha said. “With China controlling more than half of the world’s steel capacity, what it makes in 24 hours is what we produce in one year. We aren’t even in infancy; we are at a nascent stage.” But he is optimistic about the future. “The future presents phenomenal opportunities for the steel industry to grow manifold in the medium- to long-term. With the country’s 70pc population under 30 and a very low per capita consumption, the industry has only one way to move up from here. The future drivers of growth in the steel industry shall be industrialisation, urbanisation and expansion of smaller cities/towns, infrastructure spending and housing.”
Agha Steel operates in the long steel (rebars and billets) segment, which is three-quarters of the country’s steel capacity and has attracted most investment in the large-scale, graded or quality steel-making production in recent years. The flat products, sheets and coils, account for the remaining steel capacity. The ungraded industry in both long and flat segments is heavily fragmented and has more than 600 small units that use highly inefficient production technology.
At present, the company has a melting capacity of 400,000 tonnes and rerolling capacity of 250,000 tonnes. With the completion of its next phase of capacity expansion in June next year its rerolling capacity will increase to 650,000 tonnes. “We have made the largest private sector investment in steelmaking since 2011 because we believe that a young population and massive infrastructure gaps offer unlimited opportunities.”
Asked if his firm would become the country’s largest private steel manufacturer after addition of new capacity, he replied: “we are not in pursuit of being the largest steelmaker. Our goal is to manufacture high quality and diversified steel products most efficiently as per world standards. For us, the quality of our products remains paramount.”
It is because of the company’s focus on quality that its 75pc revenue comes from institutional sales and 25pc from commercial sales through wholesalers and distributors. The ratio is reversed when it comes to the sales patterns of its competition whose commercial sales generate 70pc of their revenue. “Our focus on institutional sales allows the firm to focus on the big-ticket projects where the quality of the products is vital. With the trend to construct high-rise buildings in major cities catching up fast, we expect demand for quality steel products to increase rapidly going forward,” Mr Agha pointed out.
Moreover, his company has further leveraged its technological processes by conducting groundbreaking R&D in the steel industry in order to manufacture specialised high-quality billets such as low carbon and ultra-refined alloy graded billets for use in Pakistan’s ever-growing and promising downstream engineering industry.
Agha Steel has been the industry leader when it comes to using the latest, most efficient steelmaking. It was the first company in the private sector to invest in European Electric Arc Furnace technology with 100pc refined steel making capabilities. This technology promises to save up to 25pc of the total electricity consumption and is less labour intensive, more efficient and environmentally friendly. Currently, the company is installing a continuous steelmaking and rolling mill using the state-of-the-art Micro Mill Danieli (MiDa) technology.
Agha calls MiDa disruptive technology that features a continuous uninterrupted production cycle from raw material to the finished product and reduces the production cycle from days to just two hours. “It’s a game-changer for us,” he says. “From the yield perspective, Pakistan’s standard conversion or yield from billet to rebar is 90-92pc. The global standard is around 96-96.5pc. However, only a few mills in Pakistan have reached these levels, which is highly encouraging for our steel sector development. Conversely, the patented MiDa technology guarantees a yield of 99.2pc. In addition to increased yields, there are huge savings on energy consumption as it is the most efficient technology available today. The higher yield and lower energy usage will lead to substantial savings and growth.”
Published in Dawn, The Business and Finance Weekly, November 30th, 2020